What happened to capital adequacy

The Federal Reserve on Friday announced it has completed the Comprehensive Capital Analysis and Review (CCAR), its cross-institution study of the capital plans of the 19 largest U.S. bank holding companies.

As a result of the CCAR, some firms are expected to increase or restart dividend payments, buy back shares, or repay government capital. The Federal Reserve on Friday will discuss the reviews and its decisions with firms that requested a capital action. All 19 firms will receive more detailed assessments of their capital planning processes next month.

So what happened to capital adequacy and the need to protect the banking system. If there is a need for more capital in banks, and/or less leverage, you are not going to be able to have this happen if funds are paid out in dividends. Similarly, a stock buyback reduces the amount of capital that is held in the market. Under normal times, a buyback or a dividend would make sense if there less opportunities in the banking sector. That may be the case now, but there is the larger policy of capital adequacy.This review seems all the odder given that deposit insurance is provided by the government, there is a too big to fail issue, and the Fed is supposed to look at macroprudential systemic risk issues. We should also not forget that the policy of lowering rates to zero has the intent of making banks more profitable to offset loses. It would seem that the first issue would be to have banks retain more cpaital until a global policy can be determined.

Bnaks are preparing to announce buybacks and dividend increases. This is is the new Washington consensus of cooperation between the government and large financial instiutitions. The public and economists should not be happy with this direction.